Economic Anxiety - Fear to Invest - Fear from Entrepreneurship
The adage "once burned, twice shy" suggests that when someone has had a bad experience, he or she is likely to shy away from being in the same situation again, having better learned to deal with it.
The Flight From Risk
December 13, 2010
By Robert Samuelson
Robert Jacob Samuelson (born 1945) is a contributing editor of Newsweek and The Washington Post where he has written about business and economic issues since 1977. His columns appear in both publications. His articles also appear in the Los Angeles Times, The Boston Globe, and other influential newspapers. Because he writes on economic issues, he is sometimes confused with Nobel laureate in Economics Paul Samuelson, to whom he is not related.
The Flight From Risk
Some excerpts :
A similar nervousness afflicts the stock market. Many investors have quit. They can't stand the volatility. In 2007, stock mutual funds received net inflows of $91 billion; in 2010, net outflows have totaled $31 billion. By some indicators, stock prices are low. Greenspan says the so-called "equity risk premium" is at a 50-year high. This means that investors aren't paying much for present profits. Either stock prices are exceptionally depressed or the economy's future performance is being heavily discounted.
All this may seem a prudent reaction to the follies that fostered the financial crisis. But where does prudence stop and paranoia start?
The economics of mood swings are obscure, even to economists. If Americans are blue today, might they become rosy tomorrow? A continued recovery could prove reassuring. As confidence builds, the economy could spontaneously accelerate. On the other hand, deep-seated anxieties might defy easy remediation. The serial efforts at economic "stimulus" (example: last week's proposed cut in payroll taxes) could prove ineffective. If they telegraph government leaders' desperation, they could deepen the public's own doubts. Consumers, business managers and investors might become more precautionary.
The Great Recession's most worrisome legacy could be this common allergy toward risk-taking. Having underestimated risks in the bubble years, we may overestimate them now. Consider the shriveling of venture capital -- a big source of money for high-tech startups. In 2009, venture capital funds raised less than half what they had in 2007, and inflows in 2010 are running 27 percent below 2009 levels. The institutions (pensions, endowments) and wealthy individuals that provide venture capital have less money to invest and are less willing to commit it to chancy firms.
Growth companies are being choked. The flight from risk is reinforced by an aging society -- are 55-year-olds more daring than 35-year-olds? -- and new government regulations inspired by the last financial crisis. The cautionary bias is an understandable reaction to the past that could burden the future.